It is no wonder that the euro-zone peripheral countries are having such a difficult time getting their acts together, they are basically shooting themselves on the foot.
They don't have access to monetary policy tools that could help them inflate their way out of the debt conundrum, they don't have a federated political system that would automatically inject much needed cash into their economies, they don't have an independent central bank to rely on as "lender of last resort" that would put a cap on borrowing costs. To make matters worse, they cannot even resort to the tools that they do have at their disposal such as fiscal stimulus plans. These are severely constrained due mainly to outside imposed hard core austerity measures. They are in fact so severe that they risk triggering uprisings, threatening to plunge the whole continent into a deep recession with significant long term consequences.
To provide you an idea of what I am talking about, I recently came across some of the austerity measures that will be imposed on Greek citizens. I found them worrying to say the least.
According to the plan:
They don't have access to monetary policy tools that could help them inflate their way out of the debt conundrum, they don't have a federated political system that would automatically inject much needed cash into their economies, they don't have an independent central bank to rely on as "lender of last resort" that would put a cap on borrowing costs. To make matters worse, they cannot even resort to the tools that they do have at their disposal such as fiscal stimulus plans. These are severely constrained due mainly to outside imposed hard core austerity measures. They are in fact so severe that they risk triggering uprisings, threatening to plunge the whole continent into a deep recession with significant long term consequences.
To provide you an idea of what I am talking about, I recently came across some of the austerity measures that will be imposed on Greek citizens. I found them worrying to say the least.
According to the plan:
- Wages would be cut on average by 15%
- Pensions would be cut on average by 20%
- VAT would be increased by 4%
- A "solidarity" tax of between 2 and 5% would be levied
- The income tax threshold would drop from 12,000 EUR to 5,000 EUR
- Property tax would jump from 3 EUR to 5 EUR per square meter
There were additional measures which I don't recall but, even without them, this would be more than sufficient to trigger widespread rioting were it to be enforced.
In the end, when push comes to shove, it is likely that European authorities will take extraordinary measures to avert a total meltdown. What they are not really paying attention to, however, is that the more they wait, the more costly it will be.
